If an employee has more than $50,000 in employer-provided group term life coverage, then the value of the coverage that exceeds $50,000, minus any amount paid with after-tax payments, must be included in the employee’s gross income, subject to FICA and federal income tax.
Employer-provided group term life in this context means that the employer pays all or part of the premiums, or allows employees to pay premiums pre-tax through a cafeteria plan. Thus, if the employee pays group term life premiums for coverage exceeding $50,000 on an after-tax basis, then income would not be imputed.
The value of group term life coverage is determined by using the IRS’s age-based rates, known as the "Table I rates," and NOT by using the charged premium amount. Employers would use the employee’s age at the end of the tax year. A link to the Table I rates is listed below.
For example, if an employee receives $60,000 in employer-paid group term life coverage, then $10,000 in excess coverage (60,000 - 50,000 = $10,000) must be imputed back to the employee using the IRS’s Table I rates. If the employee is 46 years old, the Table I rate is $0.15 per $1,000 of coverage. Therefore, $1.50 per month would be imputed to the employee, which equals $18 for the year ($1.50*12).
In addition, any spouse or dependent group term life coverage provided by the employer would also need to be imputed if the amount exceeds the “de minimis” amount of $2,000. This is the case even if the spouse or dependent amount is less than $50,000. The total amount must be imputed to the employee using the Table I rates, based upon the spouse’s or dependent’s attained age at the end of the tax year.
As another example, an employee’s spouse receives $20,000 in group term life insurance paid by the employer (or via pre-tax salary reductions). If the spouse is 42 years old, the employer would multiply $.10 (Table I rate for a 42 year old) times $20,000, which equals $2 per month or $24 per year ($2*12). Thus, $24 must be added to the employee’s taxable income.
Now, if an employer offers employee-paid voluntary group term life and charges a composite rate (i.e., a subsidized or average rate), where older employees pay less than the Table I rates and younger employees pay more than the Table I rates, then a situation known as “straddling” occurs.
When the plan straddles the Table I rates, those who pay less than the Table I rates will have imputed income for insurance in excess of $50,000, calculated using the difference between the Table I rates and the additional premium. In this case, this is true even if the employee pays the entire premium with after-tax dollars. However, those who pay more than the Table I rates will not have imputed income.
These rules are typically misunderstood, miscalculated, or ignored more often than it should be. Employers need to review their group term life policies to ensure compliance with IRC Section 79.
IRS Publication 15-B for 2020 (see rates on page 14): https://www.irs.gov/pub/irs-pdf/p15b.pdf